VENEZUELA: WOOD GROUP ASSETS SEIZED, ENSCO FILES

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000644 SIPDIS ENERGY FOR CDAY AND ALOCKWOOD, DOE/EIA FOR MCLINE HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR RJARPE COMMERCE FOR 4332/MAC/WH/JLAO NSC FOR RKING E.O. 12958: DECL: 05/22/2019 TAGS: EPET EINV ENRG ECON VE SUBJECT: VENEZUELA: WOOD GROUP ASSETS SEIZED, ENSCO FILES CONTRACT TERMINATION LETTER REF: A. CARACAS 592 ¶B. CARACAS 581 ¶C. CARACAS 136 Classified By: A/Economic Counselor Richard T. Yoneoka, for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: PDVSA published a new list of oil service sector companies that it has added to the government's reserve, including Wood Group's local subsidiary, Simco. Wood Group continues to hold out hope that PDVSA will negotiate a fair compensation package, but has not ruled out international arbitration. On May 1, ENSCO delivered a 30-day contract termination notice to PDVSA for the ENSCO 69 offshore drilling rig. PDVSA's seizure in January of the same rig might cause ENSCO to lose its political risk insurance on ENSCO 68, currently under contract to Chevron, Repsol, and Teikoku. END SUMMARY. ¶2. (C) Per Neil Harvie, Wood Group President for Latin America & Caribbean (strictly protect throughout),Wood Group's Venezuelan operation, Simco, delivered a contract termination notice to PDVSA on May 18. On May 20, the GBRV published a new list of companies that it has added to the government's reserve (effectively expropriating the assets), included Simco. Harvie remarked, "It was as if PDVSA suddenly remembered Simco." Harvie stated that Simco had attempted for months to work through the situation with PDVSA officials, but had been ignored. PDVSA formally went into default on the Simco contract on March 1 and took over operational control of Simco's operations on March 4. The electronic monitoring system in Simco's headquarters was recently dismantled. The last time Simco staff was able to check remotely the status of the 18 injection platforms they had been operating only 12 were still functioning. Harvie remarked that Wood Group holds out hope that PDVSA will enter negotiations regarding the Simco seizure, but concluded that Wood Group could resort to international arbitration to recover its losses. ¶3. (C) During a meeting with ENSCO Senior Vice President P.J. "Jeff" Saile and General Manager John Knowlton (strictly protect throughout),PetAtt learned that on May 1 ENSCO submitted a 30-day contract termination notice to PDVSA concerning the ENSCO 69 mobile operating drill unit (MODU). PDVSA seized the offshore drill rig in January 2009 after ENSCO announced it would cease operations due to PDVSA's failure to pay arrears. PDVSA's outstanding balance due to ENSCO is in excess of $50 million with ENSCO continuing to spend $400,000 every two weeks in operational and labor costs. Saile claimed that ENSCO's major concern is a notice of non-renewal of its political risk insurance on the company's second rig in Venezuela, ENSCO 68 (under contract to Chevron, Teikoku, and Repsol). Saile and Knowlton were in Venezuela to seek meetings with PDVSA concerning ENSCO 69 and discuss the insurance issue on ENSCO 68 with Chevron, Teikoku, and Repsol. If ENSCO is not able to renew the political risk insurance, it will require the three private sector companies to provide indemnification for political risk if they decide to keep the rig in Venezuela. Saile added that of ENSCO's fifty rig global fleet, the political risk insurance costs for the two rigs in Venezuela represent fifty per cent of the global cost. ¶4. (C) COMMENT: PDVSA's inclusion of Simco in the latest expropriation round brings some closure to the open question of its intentions. It had been operating Simco assets since March 4, leaving Wood Group unclear as to its legal position. The loss of one third of the reinjection platforms that CARACAS 00000644 002 OF 002 Simco operated does not bode well for secondary recovery operations on Lake Maracaibo as the company's operations reportedly were responsible for half of all oil production in the West. ¶5. (C) The timing of ENSCO's contract termination notice and press reports that the remaining Helmerich & Payne contracts for oilrigs will expire around the same time could set up an interesting opportunity for the GBRV to expropriate drill rigs next. It could prove convenient to seize foreign-owned drilling rigs as the owners attempted to re-export them from Venezuela. The recent expropriations of Williams' Wilpro and Wood Group's Simco assets represent the two most significant secondary recovery projects in Venezuela. The other seizures on Lake Maracaibo of service companies seem to relate to Zulia's role as the opposition's base of support. END COMMENT. GENNATIEMPO